By Nicholas Abe
It is hard to go an hour without seeing another headline related to Robinhood cross the screen, as the investing world has been captivated by the motley crew of investors that call the Reddit stock and option trading community r/wallstreetbets home.
What piqued my interest was Hertz /zigman2/quotes/200655672/composite HTZ -3.08% attempting to raise money by selling equity (later quashed by the Securities and Exchange Commission) after filing for bankruptcy, with the sole goal of selling worthless equity to Robinhooders.
As a chartered financial analyst with over a decade of capital markets experience, this raised two specific questions in my mind. How good or bad are these investors? And are these amateur investors responsible for the recent run-up in securities prices?
To gain insights on investor performance and market influence, I analyzed stocks that trade on the platform within the Russell 1000 index /zigman2/quotes/210598144/delayed RUI -2.41% using publicly available tracking information.
First, are Robinhood users successful investors?
To answer this, I analyzed the widely held Robinhood stocks within the Russell 1000 and compared them to the median results of the stocks within the Russell 1000.
This process essentially takes the median volatility and return profile of the widely held (defined as more than 10,000 holders) stocks of Robinhood investors and compares them to the median return and volatility of the Russell 1000 constituents.
Robinhood investors do have a reputation as risk-takers, and the data proves this. In fact, as shown in the chart below, on average Robinhood investors take significantly more risk than your average Russell 1000 stock — a risk appetite that seems to have grown since the COVID-19 crisis began.
But has their risk appetite translated into worse future returns for their holdings?
To answer this, we looked at the future 1-month returns at each point in time to see if the increased risk-taking was resulting in worse returns for Robinhood investors. For example, if we looked at the 54 securities that had over 10,000 Robinhood holders on March 8, 2018, we see they had a median return from March 5, 2018, to June 3, 2018, of 4.73% vs the Russell 1000 median return of 2.97%. The chart below shows those future results over time:
Shockingly, there are very few times that Robinhood investors (on average) performed materially worse than the market — and they appear to have done better than the market during the COVID-19 crisis.
Robinhood investors have been buying riskier stocks, but have also been performing slightly better than the market.
As for our second question, is Robinhood responsible for moving the market?